The Jaecke Group, Inc. manufacturers various kinds of hydraulic pumps. In June 2021, the company signed a four-year purchase agreement with one of its main parts suppliers, Hydraulics, Inc. Over the four-year period, Jaecke has agreed to purchase 100,000 units of a key component used in the manufacture of its pumps. The agreement allows Jaecke to purchase the component at a price lower than the prevailing market price at the time of purchase. As part of the agreement, Jaecke will lend Hydraulics $200,000 to be repaid after four years with no stated interest (the prevailing market rate of interest for a loan of this type is 10%). Jaecke's chief accountant has proposed recording the notes receivable at $200,000. The parts inventory purchase from Hydraulics over the next four years would then be recorded at the actual prices paid. You do not agree with the chief accountant's valuation of the note and his intention to value the parts inventory acquired over the four-year period of the agreement at actual prices paid. What entry would you use to account for the initial transaction and why do you have a different opinion than the chief accountant? What entry would you use to account for the subsequent purchase of 25,000 units of the component for $650,000 when it's market value is 26.60 per unit and why is this one different as well?
The Jaecke Group, Inc. manufacturers various kinds of hydraulic pumps. In June 2021, the company signed a four-year purchase agreement with one of its main parts suppliers, Hydraulics, Inc. Over the four-year period, Jaecke has agreed to purchase 100,000 units of a key component used in the manufacture of its pumps. The agreement allows Jaecke to purchase the component at a price lower than the prevailing market price at the time of purchase. As part of the agreement, Jaecke will lend Hydraulics $200,000 to be repaid after four years with no stated interest (the prevailing market rate of interest for a loan of this type is 10%). Jaecke's chief accountant has proposed recording the notes receivable at $200,000. The parts inventory purchase from Hydraulics over the next four years would then be recorded at the actual prices paid. You do not agree with the chief accountant's valuation of the note and his intention to value the parts inventory acquired over the four-year period of the agreement at actual prices paid. What entry would you use to account for the initial transaction and why do you have a different opinion than the chief accountant? What entry would you use to account for the subsequent purchase of 25,000 units of the component for $650,000 when it's market value is 26.60 per unit and why is this one different as well?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
Transcribed Image Text:The Jaecke Group, Inc. manufacturers various kinds of hydraulic pumps. In
June 2021, the company signed a four-year purchase agreement with one
of its main parts suppliers, Hydraulics, Inc. Over the four-year period,
Jaecke has agreed to purchase 100,000 units of a key component used in
the manufacture of its pumps. The agreement allows Jaecke to purchase
the component at a price lower than the prevailing market price at the time
of purchase. As part of the agreement, Jaecke will lend Hydraulics
$200,000 to be repaid after four years with no stated interest (the
prevailing market rate of interest for a loan of this type is 10%). Jaecke's
chief accountant has proposed recording the notes receivable at $200,000.
The parts inventory purchase from Hydraulics over the next four years
would then be recorded at the actual prices paid. You do not agree with the
chief accountant's valuation of the note and his intention to value the parts
inventory acquired over the four-year period of the agreement at actual
prices paid. What entry would you use to account for the initial transaction
and why do you have a different opinion than the chief accountant? What
entry would you use to account for the subsequent purchase of 25,000
units of the component for $650,000 when it's market value is 26.60 per
unit and why is this one different as well?
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